Euro

Euro is the European Union’s (EU) official currency, introduced to make the common European market much more trade-efficient. It was first introduced in 1999 as virtual currency (in bank accounts) – Euro paper notes and coins started circulating three years later in 2002. The countries that have euro as their official currency are collectively referred to as the Eurozone. The European Central Bank is the euro’s central bank.

The introduction of the euro was a major step forward in attaining EU’s European economic integration objective. The euro was created to facilitate a single market system, with regulation and uniform pricing. The single market setup also intended to increase competition and foster innovation and niche product development.

Purpose

A common currency was introduced to increase price transparency within EU markets, eliminate currency exchange expenses, and facilitate global trade. The strength and size of the eurozone protects the countries from external economic blows, such as currency market turbulence and unexpected oil price upsurges. A single currency setup also makes travelling within the EU easier, especially for tourists who need not break their heads over which currencies to use in which EU countries.

Euro Adoption

Contrary to common belief, not all EU member countries have taken up euro as their national currency. The countries that have adopted the currency include Austria, Finland, Belgium, Greece, Germany, Italy, Ireland, France, the Netherlands, Luxembourg, Spain and Portugal. The United Kingdom and Sweden’s EU treaty have “opt-out” clauses, which means they can have their own currencies and still be a part of the EU. The other EU countries not using the euro have not met the conditions for adopting the euro as official currency.

Before being able to adopt Euro as their currency, EU member countries had to meet certain conditions. These conditions were to ensure that taking up euro as currency didn’t harm or benefit other member countries. There were also other economic reasons behind the conditions, which were:

The country’s global currency exchange rates must fall within a certain range, called exchange rate mechanism (ERM), for a minimum of two years before adopting euro.

The country’s long-term rates of interest do not exceed the national inflation rate by more than 2 percent, and not more than 1.5 percent of the top three EU countries known for their price stability.

The nation’s public debt doesn’t exceed gross domestic product (GDP) by more than 3 percent.

The government’s total debt doesn’t exceed the country’s GDP in excess of 60 percent.

Euro Implementation in Phases

Euro was implemented despite some member countries unable to meet the conditions. The implementation process was divided into three phases – the first phase began with a Brussels EU summit in 1998. This phase revealed 15 member nations who met the conditions to use euro as national currency. In the second phase, which started on January 1, 1999, euro was introduced as legal currency in 11 out of the 15 selected countries: France, Germany, Italy, Belgium, the Netherlands, Finland, Austria, Ireland, Spain, Portugal and Luxembourg. The countries that qualified but didn’t take up the euro were Denmark, Sweden, Greece, and the United Kingdom.

In 1999, there were no euro coins or notes in circulation; therefore, the currency only had a virtual presence – meaning it was to be found only electronically (in bank accounts). The participating countries’ current currencies functioned as euro’s fixed denominations. The second phase also lead to the establishment of the European Central Bank.

On January 1, 2002, the third phase of implementation began, with Euro coins and banknotes entering circulation. By July 2002, euro replaced existing currencies of the 11 aforementioned countries along with Greece that became a part of the eurozone in 2001 – the United Kingdom chose to stick with its pound sterling. The Eurozone strengthened in number – with Malta (January 2008), Cyprus (January 2008), and Slovenia (January 2007) also adopting the euro.

Reasons Some EU Countries Don’t Use the Euro

There are nine EU countries that are not part of the eurozone. As aforementioned, Denmark and the United Kingdom are exempted and need not use the euro ever. The remaining seven countries have their reasons and limitations for not using the euro.

EU member states have their unique financial challenges and requirements. The common eurozone monetary policy doesn’t consider these differences and applies itself uniformly over all different economies. As a result, there are chances the monetary policy may bode well for a few member states and be outright terrible for other states at the same time.

Eurozone members cannot draft their own monetary and economic policies, which can hurt them during tough economic conditions. For instance, the United Kingdom, which uses its own currency, quickly slashed its local interest rates in October 2008, in the wake of the 2007-2008 economic crisis, and resorted to quantitative easing (central bank buying government securities to decrease interest rates and boost money supply) in March 2009 to stimulate economic growth. The European Central Bank, which manages the euro and implements EU monetary and economic policy, took to quantitative easing only in 2015.

Changes in interest rates can also pose issues for countries such as Greece that are extremely sensitive to such alterations. Greece’s mortgages, for instance, are based on variable and not fixed interest rates. And being a eurozone member, Greece cannot lower or manage interest rates by itself for the benefit of its citizens and economy. The UK, on the other hand, has Bank of England to take care of the country’s economics, and which has the freedom to respond as per specific interest rate environments. Such financial independence also helps when there’s currency devaluation required to tackle reduced exports, high wages and inflation, or decreased industrial production.